Expect insurance chaos if hurricane hits hard

April 10, 2010|By Mike Thomas, COMMENTARY

T

he water is warm, the upper atmosphere is calming, and so the hurricanes are predicted to howl this season.

If we get hit hard, this is what will happen: A number of small, startup insurance companies that now dominate Florida's market will fail. The state-owned Citizens Property Insurance company and state-owned hurricane catastrophe fund will go bankrupt.

You may or may not get enough money to fix your damaged house in what may or may not be a reasonable amount of time.

Confronted with massive damages and no money, Florida will go running to the bond market. The fiscal watchdog group, Florida TaxWatch, says paying off all the debt would cost about $4billion a year for the next 30years. The money will come from huge tax assessments on insurance policies — primarily home and auto.

Each insured household will have to cough up about $700 per year. The economic drain will cost the state about 70,000 jobs. But this is a very conservative calculation.

For example, it factors in a 4percent interest rate on the money Florida borrows. There is no way a bankrupt state will get that rate. Florida will be the new Greece.

The figures also do not include the losses we would be obligated to cover for customers of all the small insurers that go bankrupt. TaxWatch could not calculate the amount because it doesn't know how many will fail. Neither does the Office of Insurance Regulation even though it, well, regulates them.

The Sarasota Herald Tribune is doing an excellent series on this mess. Last month, a story noted: "In simplest terms, the average Floridian with a $350,000 house is insured by a company with less than $750 in hand to pay for that home.''

The insurers do this by leveraging themselves to the gills. If you're a student of the recent financial collapse, that should sound familiar.

The small insurers take money from policyholders and use it to buy "reinsurance'' to cover storm damages. They buy it from the state's hurricane catastrophe fund — which has about $5billion in reserves to cover up to $26billion in risk — and from private reinsurance carriers. Many of them are located offshore.

Last year, some small insurers were so broke they couldn't pay their reinsurance premiums.

Of 70 Florida-based insurers, 50 lost money last year. Several have failed despite the fact we haven't had any hurricanes. They can't even pay garden-variety claims. Can you imagine how fast this house of cards collapses when a big storm hits?

And then when another storm hits after that?

Charlie Crist created this mess. He calls selling worthless insurance policies insurance reform. Bashing insurance companies as evil and suppressing their rates is part of a political strategy to win elections.

He had help. Republican legislators, including former House Speaker Marco Rubio, approved much of this. Consumer groups and editorial boards cheered. Stick it to the man.

Insurance Commissioner Kevin McCarty turned the Office of Insurance Regulation into a political action committee for Charlie.

Various bills in the Legislature would start fixing this mess. One would help keep well-funded insurers such as State Farm in the state by allowing them to charge unregulated rates, giving customers the option of paying to keep them or opting for a small, cheap carrier regulated by Charlie and Kevin.

Crist says he will veto it. Far behind Rubio in the Senate race, he is breaking out oldie-goldie populism to catch up.

He will force legitimate insurers out of the state, and force you to sign up with a carrier that he can't guarantee will pay your claims.

And Charlie wants to take this kind of common-sense conservatism to Washington.